Define: Securities Dispute Resolution: Deciding Whether To File An Arbitration Claim

When individuals invest their money, they are often required to sign an agreement stating that any disputes with their broker must be resolved through arbitration rather than in court. This entails presenting their case to a neutral third party who will make a decision on the matter. Before opting for arbitration, there are several factors to consider. Firstly, arbitration can be costly, with various fees and expenses involved, including the potential need to hire legal or expert assistance. Secondly, although arbitration proceedings are confidential, individuals may be required to disclose sensitive information to the opposing party. Thirdly, the arbitration process can be time-consuming. Lastly, even if successful, there is no guarantee of recovering funds if the broker lacks sufficient resources. While most issues are resolved through negotiation, arbitration may be necessary in certain cases.

Investors who open investment accounts with brokers are often required to sign arbitration agreements, meaning that any disputes with their broker must be resolved through arbitration. Before initiating an arbitration claim, investors should carefully consider several factors and conduct a cost-benefit analysis. There are four key factors to take into account before filing an arbitration claim:

1. Costs: Arbitration can be expensive, particularly for small claims. The Financial Industry Regulatory Authority (FINRA) imposes various fees for initiating and continuing the arbitration process, including filing fees, hearing session fees, and arbitrator compensation fees. Additionally, investors may need to consider the costs of legal assistance from attorneys and hiring experts to support their claims. If the costs outweigh the potential relief sought, alternative dispute resolution methods such as negotiation or mediation may be more suitable.

2. Privacy: Although arbitration is a confidential process, parties may be required to disclose private information to the other side. This information could include financial details, criminal records, and family relationships, among other disputed issues. Investors should be aware of the potential privacy implications before proceeding with arbitration.

3. Duration: Parties must decide whether they are willing to endure the time it takes to complete the arbitration process. The length of arbitration cases can vary, with settlements typically taking just over a year and cases proceeding to a hearing lasting around 16 months. Simplified decisions are often reached in less than a year. While arbitration generally offers a quicker resolution compared to litigation in court, parties should still consider the time commitment involved.

4. Likelihood of Recovery: It is important to assess the other party’s ability to pay if relief is granted. If the broker or brokerage firm goes out of business or declares bankruptcy, the claimant may struggle to recover even if they receive a favorable award. While the costs associated with arbitration can be significant, it is worth noting that approximately 80% of arbitration cases result in a settlement between the parties through negotiation or mediation. However, settlement is not guaranteed, and around 10% of cases are withdrawn or closed without resolution.

For instance, if an investor suspects their broker of fraudulent activity, they may contemplate filing an arbitration claim. Nevertheless, they should carefully evaluate the costs, privacy implications, duration, and likelihood of recovery before proceeding with the case.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 16th April 2024.